Recouping accidental overpayments to employees

Let’s imagine a scenario where someone in payroll accidentally pays an employee $1100 when they should only have been paid $1000 or maybe the automated pay system paid someone for time they took as leave without pay. Is the employer able to retrieve the overpayment, and if so, how do they go about it?

Provided the error is discovered before the following payday, an employer is entitled pursuant to Section 6 of the Wages Protection Act 1983 to deduct the overpayment from subsequent payments, but only if the overpayment could not have been reasonably avoided, the employer gives notice to the employee that the employer intends to recover that overpayment and that the overpayment is recovered within the following two months.

All well and good—but what if the employer does not realise the overpayment has been made until after the next payday, or in fact, it becomes apparent that the employee was being accidentally overpaid for an extended period of time?

First, try the reasonable approach of writing to the employee, explaining how and when the specified overpayment was made, and seeking their written consent to deduct the amount from their next pay(s). If the employee agrees to the deduction(s) in writing, then the problem is solved, and it would be a good time for the employer to audit their payroll system to ensure the error doesn’t happen again.

However, if the employee refuses to provide consent to the employer to deduct an overpayment from future payments, things can become a little trickier and the factual matrix in which the overpayment occurred can become very important. Two interesting cases demonstrate the two different paths recouping overpayments can take.

In the 2012 Employment Court case of Foai v Air New Zealand, Mr Foai was promoted from a part-time baggage handler to a temporary full-time administrative role, anticipated to last for three months. Because the new role was only temporary, the terms were only evidenced in a letter, and the rate of pay was vaguely worded as being his average hourly pay for his usual (part-time) role as a baggage handler. Mr Foai’s new role was extended numerous times over a 16-month period, each time via the same vague letter regarding his pay.

Mr Foai started to notice that his pay had become very erratic, yo-yoing up and down and in many cases, well in excess of what he had been expecting. Over the 16 months of his temporary role Mr Foai variously raised this issue with his manager, HR and a person in payroll. He repeatedly queried whether the pay he was receiving was correct. Commitments were made to investigate the matter, but no-one took it seriously until he had been in the role for 16 months. By that time, it became apparent that Mr Foai had been overpaid more than $42,000. Understandably, his employer wanted Mr Foai to pay this money back.

Unfortunately, Mr Foai had come to believe that his pay must have actually been correct, and with his new position involving him in regular interaction with managers and even the CEO, he rationalised that this must be what happens when you rise up through the ranks. He was also required to travel frequently and had no idea what payments he received as a result of this. Consequently, he adjusted his lifestyle to his improved position, shouting his parents a long-overdue trip back to Samoa, a trip for himself to Hawaii and even his child support payments were increased by IRD as a result of his increased remuneration. Mr Foai relied on the equitable defence of change of position (in reliance on the employer’s error in this case) to argue why the overpayments should not be repaid.

The Employment Court held that the employer had the responsibility to ensure they paid employees correctly and that Mr Foai’s repeated questioning as to whether his pay was correct should have led them to investigate the matter. Further, this failure to investigate in conjunction with the vague references in the renewal letters as to what Mr Foai should actually be paid, were sufficient to lead Mr Foai to believe he was on the correct remuneration and to alter his lifestyle in reliance on that. The Employment Court declined to order Mr Foai to repay the overpayments.

However, in a matter before the Authority in January 2018 (Evolve Education Group Limited v Hobbs) the opposite outcome resulted. The employee, Ms Hobbs, reduced her hours from 25 hours per week to five hours per week. She informed her employer of this and her employer asked her to complete weekly timesheets, which she failed to do. Two months later, in September 2016, Ms Hobbs informed the employer they were still paying her for 25 hours per week when she was only working five, and asked for a new employment agreement. A new agreement was emailed to her incorporating the changes, but she failed to sign and return it. It was not until April 2017 that a new payroll administrator picked up the error that Ms Hobbs was still being paid for 25 hours per week, and that the overpayments amounted to $14,750.

The Authority held that the employer had the right to restitution in this case and that Ms Hobbs must pay the money back, given she had been unjustly enriched by the employer’s error. Ms Hobbs tried to use the same defence as Mr Foai (the equitable defence of change of position) however, it failed in this case given Ms Hobbs had clearly known all along she was being overpaid (unlike Mr Foai) and it was therefore not reasonable for her to have altered her position, knowing the ongoing overpayments were an error.

The take-home tip from these cases is that, on the rare occasion when an employee informs an employer they may be being overpaid, investigate it – immediately!